How a margin loan works

A margin or investment loan is a form of gearing that lets you borrow money to invest in approved shares or managed funds, using your existing cash, shares or managed funds as security. The amount that you can borrow is determined by the securities in your portfolio, their Loan to Value Ratio and a credit limit based on an assessment of your financial position.

Why Borrow to Invest

Access additional funds for investment which may help you reach your financial goals faster.

Potentially increases the size of your investment returns.

Interest payable on a margin loan may be tax deductible.

May defer taxation on potential capital gains, as you do not have to sell your existing investments to make new investments.

Allows you to diversify your portfolio. A larger range of investment choices could increase your returns and reduce the risk that poor performance in any one investment will drag down your total return.

Understanding Risk

Like any investment, a margin loan involves some risk. While borrowing to invest more money in shares and/or managed funds may increase potential returns, it can also increase potential losses. The most common risks associated with margin loans are:

Margin calls as a result of market volatility and/or high gearing levels

Increase in borrowing costs, i.e. interest rate increases

Reductions in loan to value ratios assigned to securities.

A margin call usually occurs when the market value of your security portfolio falls significantly, which in turn will reduce your borrowing limit. This will also cause a rise in your gearing level, as your loan balance has not changed. If your current gearing level exceeds your maximum loan to value ratio, a margin call may occur. To provide you with some breathing space in this instance, we offer a buffer, which is added to the market value of the approved securities in your portfolio. The buffer is currently 10%, and ensures that small market fluctuations do not trigger a margin call.

Approved securities

Margin loan case study

Jim's existing portfolio

Jim has an existing portfolio valued at $50,000. He works out that he can borrow up to $116,000 if he takes out his maximum loan value and invest $166,000 (assuming a loan to value ratio of 70%).

How he invests

He chooses to borrow $50,000, giving him a total amount of $100,000 to invest (including his existing portfolio worth $50,000). Jim also chooses to prepay his interest in advance, as it is tax deductible based on his own personal financial circumstances.

Jim can now invest the borrowed $50,000 in securities he selects from the approved securities list.

Options for the future

In 5 years' time Jim intends to cash in his portfolio. If at this time it has increased in value, he will be able to pay off the loan and keep any extra amount.

Effect of a margin call

During the 5-year period there may have been a margin call. This would have been made if the amount Jim owed was more than his portfolio security value, and he would have had to put in additional capital of his own, or sell part of his portfolio to restore the margin.

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Things you should know

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